1940: A World at War

Sep 27, 2005

Article By: Scott Burns

America was nominally at peace when Bobby was born. The Battle of Britain was raging in Europe. The Japanese had already invaded China and sacked Nanking. The attack on Pearl Harbor and the official start of World War II was only a year away.

Ida May Fuller received the first Social Security retirement check at the end of January 1940. It was for $22.54. The check launched the receiving end of a desperately needed retirement system. It would help millions of Americans sustain themselves when they could no longer work. Most people had lost any savings they had in the bank failures of the Great Depression. Many had also lost their homes. Only 43.6 percent of households owned a home in 1940, down from 45.6 twenty years earlier.

The life expectancy of a new born male in 1940 was only 60.8 years. That's less than the 65 years required to qualify for Social Security at the time. It's also less than early retirement at 62 women were allowed in 1958 and men were allowed in 1961. This meant that more than half of all newborns would not live to collect their first Social Security check.

Men who survived to 65 could expect to live another 12.7 years. Today, a newborn male has a life expectancy of 74.1 years at birth and a 65 year old man can expect to live an additional 16.3 years.

These are enormous changes.

But they aren't free. If more people survive to age 65 and then live longer in retirement, they will all need more money. The money came from higher employment taxes. In 1940 the combined employer/employee payroll tax was 2 percent of earnings up to $3,000 a year. That's a maximum of $60 a year, of which $30 came from the employee. Today the tax, including 2.9 percent for Medicare, is 15.3 percent of earnings up to $90,000. That's a total of $13,770.

Much of the change in life expectancy was due to advances in public health and the development of vaccines and antibiotics. Although 45 percent of all homes still didn't have complete indoor plumbing in 1940, 70 percent had electricity, and most had radios. Television had been invented but was still so rare ownership wasn't counted in the census.

Fortunately, sex, the early alternative to TV, was becoming much safer. Venereal diseases like Syphilis and Gonorrhea, scourges of the 19th and early 20th century, could be cured with a few shots of Flemings' penicillin. Infections plummeted during the 30's. They remained low for 60 years.

The change ushered in the age of No-Fear sex. It was the first pillar of a global sexual cornucopia. The second pillar was the introduction, in 1960, of the first birth control bill.

The year 1940 may have begun the greatest expansion in the distribution of wealth in history, some of it by intention, some by accident. The shock of the depression (and the fear of communists) had brought the New Deal and the creation of safeguards that simply didn't exist in 1920.

Savings were insured.

Home mortgages were lengthened to 30 years and insured by government. Down payments were reduced. Working Americans soon learned that almost every dollar spent on a home mortgage was magically transmuted into home equity. They took money out of one pocket for a mortgage payment but it magically reappeared in another pocket as rising home value.

Middle income savers could lose purchasing power in regulated savings accounts and government Savings Bonds because the interest rates were routinely below the rate of inflation. But that barely mattered: Most Americans borrowed far more to own a house. They lost purchasing power on their savings accounts but they made it up, in spades, on home appreciation.

By 1960 nearly 62 percent of all households owned their homes. One of the big numbers in the consumer balance sheet was home equity. The combination of inflation, regulated savings institutions, and home ownership had created a safe way to build wealth.

The G.I. Bill of Rights, better known as the Servicemen's Readjustment Act of 1944, helped 2.4 million veterans attend colleges and universities, provided school training for 3.5 million more, and supported on the job training for an additional 3.4 million in a period of seven years. Although intended to help returning veterans find jobs and adjust to the peacetime world, it may have been the largest single investment in "human capital" in history.

Employee benefits were another unintended consequence of the war. They grew from the shortage of workers. Unable to compete by raising wages (due to wage controls) employers increased employee benefits. Pension plans, a rarity in the 30's, were common benefits by the late 40's. Health insurance was another major benefit added during the period. Add the unemployment insurance program created as part of the 1935 Social Security Act and the economic security, purchasing power, and net worth of American workers soared following World War II.

Ask most Americans to name the biggest (and most frightening) advance to come out of World War II, and you'll hear about Nagasaki, Hiroshima, and the atomic bomb. In fact, other scientific and mathematical developments were massively accelerated by the war.

Managing the flow of men and equipment on two vast fronts required new tools. Operations Research was one result, now often recognized as "supply chain management." Similarly, work on decoding encrypted messages by Claude Shannon, Norbert Weiner, and others led to modern information theory. Its applications are now fundamental in telecommunications, networks, linguistics and genetics.

Communication issues also drove the creation of the transistor by William Shockley in 1948 and that, in turn, led to the creation of the first integrated circuit by Jack Kilby at Texas Instruments in 1959. (It is also credited to William Noyce, working separately, at Fairchild.

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